Gold Investment in India: Types, Benefits and Key Considerations

Gold is much more than an asset for Indian households. In addition to its significant cultural value, gold is often associated with financial wellbeing. The yellow metal has always been a part of Indian investment portfolios––earlier, as ornaments inherited by successive generations, and today, in the form of digital gold and ETFs alongside the physical metal.

• Table of contents

• Why should you invest in gold?
• How to invest in gold?
• Key risks of investing in gold
• Minimum investment requirements
• Comparison of returns and costs of gold investment options
• Availability of gold investment options
• Liquidity of gold investment options

Why should you invest in gold?

Gold has long been considered a hedge by investors, especially during economic downturns and periods of market volatility, potentially offering a sense of stability in both financial and psychological terms. Here are some of its benefits:

• Natural hedge: Gold is often seen as a hedge against inflation—as the value of currency declines, gold has historically* tended to retain its value or appreciate over time.
• Diversification: Gold prices do not always move in tandem with stocks or bonds. At times, they may move in the opposite direction, which can help lower overall portfolio risk.
• Crisis commodity: During periods of uncertainty, such as economic downturns or geopolitical tensions, gold prices have shown a tendency to rise.
• Liquidity: Gold generally enjoys strong demand and is widely accepted as collateral. This makes it relatively liquid and accessible during periods of financial need.
• Ownership convenience: With instruments like digital gold, ownership has become more convenient, accessible, and secure. This also enhances liquidity, because unlike physical gold, digital gold can be sold online swiftly (subject to demand and applicable settlement timelines).

*Past performance may or may not be sustained in future.

Also Read: Gold ETFs

How to invest in gold?

Apart from buying physical gold (jewellery, coins, bars, etc.), there are other ways to invest in gold digitally or indirectly. Here are some options:

• Gold exchange-traded funds (ETFs): As the name suggests, these funds are backed by gold and traded on stock exchanges.
• Sovereign gold bonds (SGBs): These are government-issued, RBI-backed bonds denominated in grams of gold.
• Digital gold: Some platforms allow you to buy digital gold (but these are not as tightly regulated as gold bonds or mutual funds).
• Gold mutual funds: These mutual funds either invest directly in gold ETFs or other gold-related securities.
• Gold savings schemes: These are monthly installment plans offered by jewellers leading to gold purchase.

Key risks of investing in gold

While gold is relatively stable, it is not entirely risk-free. Some key risks of investing in gold are:

• Price volatility: The price of gold is influenced by global markets, currency fluctuations, and the geopolitical climate.
• Storage: Physical gold requires secure storage, which can incur cost and is exposed to theft and/or damage.
• No dividends: Gold does not generate dividends, hence there is no scope income (SGBs are an exception as they offer a 2.5% annual interest).
• Transaction costs: Physical gold can incur making charges, GST, and brokerage fees that can eat into returns. Gold ETFs and mutual funds also entail expense ratios.

Minimum investment requirements

Irrespective of the ticket size, gold is widely accessible. The minimum investment depends on the instrument being used to invest:

• Physical gold can be purchased in small units such as a 0.5-1-gram coin.
• Gold ETFs can be purchased with a minimum investment equal to one unit (~1 gram of gold) plus brokerage charges.
• Sovereign gold bonds also have a similar minimum commitment amount of 1 gram.
• Gold mutual funds investment can start with SIPs of Rs. 100 in some asset management companies (the minimum investment price can vary from one AMC to another).

Comparison of returns and costs of gold investment options

Availability of gold investment options

Buying gold is easier than ever. Regardless of location or budget, gold investment options are just a click or a walk away.

• Physical gold is widely available through jewellers and banks. However, the authenticity of sources must be validated to avoid purity concerns.
• Gold ETFs and mutual funds are available to be purchased via distributors, mutual fund companies and investment apps/portals.
• SGBs are issued by the government and are also tradable later in the secondary market. While no new SGB tranches have been announced, older issues can be bought on the secondary market.

Liquidity of gold investment options

Apart from being relatively secure from volatility, gold is also a fairly liquid asset:

Also Read: Gold ETF vs gold mutual fund

Conclusion

Gold has been an important part of Indian portfolios for generations. Today, investors have a multitude of ways to invest in gold and earn potential returns. This has paved the way for investors to expand their portfolios and hedge other forms of investments against gold. Therefore, gold is a key asset in potential long-term wealth creation and diversification.

FAQs

How much should I invest in gold in India?

It’s a personal choice and depends on your goals, risk profile and other investments.

Is gold investment in India profitable?

In the long term, gold can deliver reasonable potential returns. Additionally, it can provide a hedge against inflation and volatility.

What affects the gold prices in India?

Global gold prices, currency fluctuations, demand-supply dynamics, inflation, and geopolitical events, among other factors, can influence gold rates in India.

Should I make the gold investment in India?

The choice depends on your personal preferences, investment approach and priorities. Gold can be a suitable addition to a diversified portfolio that also contains other asset classes such as stocks or equity mutual funds for long-term growth potential and bonds or debt funds for relative stability.

Are gold ETFs better than gold funds?

Neither option is inherently better. Gold ETFs may have relatively lower expense ratios than gold mutual funds but can only be purchased on the stock exchange through a demat account. Gold mutual funds, meanwhile, can be bought through a registered mutual fund distributor or directly from the Asset Management Company.